Many issues come into play when determining how much space a
business tenant needs when first taking possession of new office or
retail space, but consideration must also be given to what the
tenant's future needs might be.

In general, there are three ways of addressing future needs--an
option to expand, a right of first refusal, or a right of first offer.

An option to expand is available to a tenant in a strong
tenant's market. It gives the tenant the exclusive fight to take
over other space, usually adjacent to the space that is leased
initially. For the landlord, this means that space must remain vacant
and available to the tenant while the option is in effect.

While the general practice is to give the tenant a limited period
of time in which to exercise the option, occasionally the option is
delayed for some period of time, say five years, giving the landlord the
ability to rent out the space to another tenant.

Once that five-year period expires, the tenant has the fight for
some limited time to exercise the option.

Whether the tenant pays anything to the landlord during the option
period is subject to negotiation between the parties. For a strong
tenant in a tenant's market, there might be no payments by the
tenant. In a landlord's market, a tenant might be required to pay
for the landlord's building operating costs applicable to the
space, but no actual rent.

Best for the landlord

A right of first refusal gives a tenant the ability to take over
adjacent space if a third-party tenant makes an offer to the landlord
for the space. The tenant will have a limited period of time, perhaps 30
days, to match the terms of the third party tenant and then take over
the space.

This arrangement allows the landlord to actively market the space
to third parties and forces the tenant to either match the terms offered
by the new tenant or waive its right of first refusal.

However this can create a "cloud" on the ability of the
landlord to attract new tenants, because prospective tenants will not
want to spend time putting a deal together that then has to be
"shopped" to the existing tenant during some period of time
that the new tenant could be out in the market looking for other space
that is not subject to such a right.

The landlord's position can be improved slightly by allowing
just a letter of intent from a prospective tenant, rather than a fully
negotiated lease, to trigger the notice to the current tenant. Or, the
time period within which the current tenant can exercise its right can
be shortened to 5-10 days rather than the typical 30 days.

The right of first offer is generally the best arrangement for the
landlord. When space becomes available, the landlord is obligated to
make a good faith proposal to lease it to the tenant who holds the
right, setting forth the terms under which the landlord proposes to
offer to the market in general.

The tenant then has a limited period of time within which to accept
those terms from the landlord. If the tenant elects not to do so, the
landlord is then free to bring the space to the market on the same
terms.

Unlike a right of first refusal, the landlord is no longer
obligated to go back to the tenant to give the tenant a fight to match
the terms the landlord is able to reach with a third-party tenant. This
is true even if the landlord is required to accept less favorable terms
from a * prospective tenant, provided that the offer to the current
tenant was made in good faith.

Another thing; When considering the future, it's good to
remember there has been a considerable reduction in the office space
allocation per employee over the past few years. Traditionally, the rule
of thumb for corporate office space users was 250 rentable square feet
for each employee. According to various sources, the average today is
176 square feet per employee as compared to 225 square feet in 2010, and
may shrink to as little as 151 square feet per employee in 2017.

Dan Scanlon, an adviser with Grubb & Ellis[Northern New
England, Manchester, focuses on business tenant representation and
investment sales. He can be reached at 603-206-9605 or
djs@grubbellisnne.com.

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